In December 2019 The Australian Prudential Regulation Authority (APRA) announced some changes to the Australian life insurance industry.
The main one being that from 31 March 2020 Insurers can no longer offer “Agreed Value” Income Protection policies, and these policies will not be able to include fixed terms and conditions of more than five years.
What does it mean for you?
In general, Income Protection policies provide a monthly beneﬁt of up to 75 per cent of employment income if you are unable to work due to sickness or injury.
Crucially, policies cover both physical and mental illnesses, and payments start after a waiting period lapses which can be anything from 14 days to 2 years.
Some of these policies also allow for coverage up until the retirement age of 70, and you can elect to include coverage for Superannuation contributions.
Finding the right combination for you is a sound safety net worth considering.
Here is a summary of the changes…
Interestingly under the new arrangement benefits will not exceed the policyholder’s income at the time of claim. This can have a major effect on those who need to claim while under a temporary reduced financial capacity. Meaning, if you have been on maternity or unpaid leave this could be 75% of far less than you should actually be earning or what you are really “worth”.
And if you are a small business owner you will be required to substantiate income at the time of claim with lodged tax returns and up to date book keeping.
It’s worth discussing this with your financial planner to understand your options, and policies that best suits you. Having a specialist on your side to look over the fine print can be invaluable.
APRA is looking to block insurance being sought for amounts higher than a claimant’s actual income. Policies where an insured income is locked in at the time of application will be removed (ie, “agreed value” policies will no longer be available).
APRA is also seeking to limit contract terms to ﬁve years, with customers given a continuation option into the insurer’s current on-sale product. This will effectively allow insurers to adjust unsustainable contract terms for existing customers over the next few years.
Does income insurance really pay if I need it?
According to the statistics, Income Protection insurance does pay out when people need it. Just under 40,000 people were paid an income protection beneﬁt over the past 12 months, with 95 per cent of assessed claims paid by insurance companies.
What should I do now?
The best course of action is to seek advice on what cover you need, how best to structure it and how to get it sorted before the new diluted products hit the market in March.
The time to act is now to beneﬁt from the existing offerings, which are likely to be grandfathered, from the 31st of March 2020, as often policies can take several weeks to be accepted by insurers.
Either gather your existing policies and book some time with your financial planner to review the terms or consider taking out a new policy to maximise your benefits.
And lastly, why is this happening now?
APRA has two major concerns about the income protection insurance now offered in the market.
Firstly, insurers have been offering income protection insurance at such low premiums that they have accumulated $3bn plus in losses over the past ﬁve years, with $1.2bn in losses over the past 12 months alone - indicating the problem is getting worse. In short, life insurance companies who offer income protection insurance are losing approximately 30c on every $1 they take in premiums.
Secondly, APRA does not want insurance products to provide a beneﬁt that over time may exceed the policyholder’s economic loss. For example, in year one of a claim, the policy would pay up to 75 per cent of the policyholder’s pre-disability income, and with an annual increase in benefits to match inflation it is likely that within 10 years their annual benefit payout will exceed their original salary. The downside is that this gives no financial incentive for the beneficiary to return to work, and is what APRA refers to as a moral hazard.
A key part of financial planning is to work towards a situation where you are financially comfortable for peace of mind no matter what life throws at you, and making the most of opportunities as they arise.
Take the time now to set yourself up well within this changing Income Protection landscape. Give me a call today, and let’s talk.
Chris van Rijswijk, CFA
Financial Adviser and Mortgage Broker
General Advice warning
This document contains information that is general in nature. It does not take into account the objectives, ﬁnancial situation or needs of any particular person. You need to consider your ﬁnancial situation and needs before making any decisions based on this information. If you decide to purchase or vary a ﬁnancial product, your ﬁnancial adviser, Christopher van Rijswijk and other companies within the AMP Group may receive fees and other beneﬁts. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.
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